Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Mass.: Trademark use enjoined for terminated 7-Eleven franchisee, (Nov 24, 2014)

By Edward L. Puzzo, J.D.

A terminated 7-Eleven franchisee could be enjoined from continued use of the franchisor’s marks and materials, but could not be enjoined from operating a competing convenience store at the same location, the federal district court in Springfield, Massachusetts has ruled (7-Eleven, Inc. v. Grewal, November 20, 2014, Mastroianni, M.).

Mr. and Mrs. Grewal were franchisees of a 7-Eleven retail location in Holyoke, Massachusetts since 2005. In 2014, the franchisor terminated the franchise agreement after an internal investigation allegedly showed that the Grewals had engaged in a scheme to deprive 7-Eleven of some of the store’s profits by fraudulently entering incorrect prices for sold items on 7-Eleven’s point-of-sale (POS) system and keeping the difference between the prices entered and the higher payments received. As part of the termination of the franchise agreement, 7-Eleven also terminated the Grewals’ sublease of the store premises, and an equipment lease, and notified the Grewals that they could no longer display 7-Eleven’s marks and could not operate a convenience store in the same store location for one year after termination. Despite the termination, the Grewals continued to operate a convenience store at the same location, which they presented to the public as an authorized 7-Eleven franchise.

Preliminary injunction requirements. The court explained that a preliminary injunction can only be granted when the plaintiff proves (1) he is likely to succeed on the merits; (2) he is likely to suffer irreparable harm in the absence of a preliminary injunction; (3) the injury he will incur if injunctive relief is not granted will outweigh the harm which granting the injunctive relief would inflict on defendants; and (4) public interest favors an injunction.

Trademark infringement. 7-Eleven brought an action to enjoin the Grewals from continuing to infringe upon their trademarks post-termination. The court stated that the evidence presented at this stage adequately supports 7-Eleven’s contention that termination of the franchise agreement was justified by the Grewals intentional and fraudulent misuse of the POS system. Consequently, the Grewals are required to immediately discontinue the use of 7-Eleven’s trademarked materials. Under the Lanham Act, the franchisor has the right to enjoin the unauthorized use of its trademark. In cases where the use of the franchisor’s mark is uncontroverted, as is true here, a likelihood of consumer confusion is presumed, the court stated. Thus 7-Eleven met the first requirement for a preliminary injunction; a likelihood of success on the merits.

Since the Grewals admitted that they continue to operate the convenience store as though it were a 7-Eleven franchise, the second element, irreparable harm, has also been shown, stated the court. The inability of a trademark holder to control the quality of items thought erroneously to derive from it are a corrosive harm in the marketplace, and the element of irreparable harm in trademark cases is shown when a party meets the first element of a likelihood of success on the merits.

In balancing the harm the injunctive relief would impose on the defendants against the harm to the plaintiffs from not granting it, the court continued, courts reviewing motions for preliminary injunctions for trademark infringement tend to lack sympathy for the defendants when they demonstrate recalcitrant behavior in their trademark infringement. Here, the Grewals continued to knowingly use 7-Eleven’s trademarked materials after receiving notification specifying that they could not do so. Finally, the court stated, the public interest would be served by preventing customer confusion over the use of trade names. Thus, 7-Eleven met all the tests for imposition of a preliminary injunction against the Grewals’ continued use of its trademarked materials, the court ruled.

Non-compete clause. 7-Eleven also brought an action to enforce a restrictive covenant in the terminated franchise agreement that prohibited the franchisees from operating a competing business in the same location for one year after termination. Here, the court concluded that 7-Eleven did not meet the requirements for a preliminary injunction and thus denied this portion of its motion.

In Massachusetts, the court explained, a covenant not to compete is enforceable only if necessary to protect a legitimate business interest and when reasonably limited in time and space. The court found that 7-Eleven’s non-compete clause in its franchise agreement was far less restrictive than other such agreements that have been upheld. Thus, 7-Eleven met the first requirement of a likelihood of success on the merits.

As to the irreparable harm element, here the court found, unlike in the trademark instance, even though 7-Eleven’s restrictive covenant will probably be deemed enforceable, it was not clear that delaying the enforcement of the covenant would cause 7-Eleven irreparable harm. Specifically, the court continued, “when the value of one (or even two) year(s) of lost profit from one of 7-Eleven’s 50,000 worldwide franchise establishments is viewed in proportion to the company’s total annual profit, the losses would likely be miniscule.” Further, denying this portion of the preliminary injunction would not cause 7-Eleven to lose its “indisputably competitive position in the market.” Once 7-Eleven’s marks are removed from the store premises, customers would have no reason to associate the store with 7-Eleven, so withholding this injunction would do no harm to 7-Eleven’s goodwill.

The court acknowledged that cases in Massachusetts and Florida have not always reached the same conclusion—enjoining the use of marks but not enjoining an activity in violation of a non-compete clause—in similar terminated franchise cases. But the court also stated that such a determination was also not unique. The court’s determination had the advantage of theoretically allowing the former franchisees to continue their business as an unaffiliated convenience store (without 7-Eleven’s marks or assistance), but only if an agreement pertaining to rent, insurance, equipment loan, costs associated with removal of trademarks, and other concerns pertaining to a temporary commercial lease can be reached by the parties.

The case is Civil Action No. 3:14-cv-12676-MGM.

Attorneys: Steven M. Cowley, Carolyn A. Alenci and Rachel E. Morse (Duane Morris LLP) and Christian C. Burden (Quarles & Brady LLP) for 7-Eleven, Inc. John E. Pearson (Law Office of John E. Pearson) for Mohinder Grewal and Grewal Corporation.

Companies: 7-Eleven, Inc.; Grewal Corporation.

Cases: FranchisingDistribution MassachusettsNews